You Can Lose With Bonds

Many investors in recent years have put money into bonds or bond mutual funds in order to receive interest income and to assure that their investment will not decline in value.

Be aware that you can lose principal in a bond investment. A decline in value primarily depends on interest rate fluctuations.

All bonds are affected by interest rate risk, regardless of the issuer’s credit rating or whether the bond is “insured” or “guaranteed.” For example, you purchased a 30-year bond when 30 year Treasuries were yielding 4%. Now you want to sell the bond and interest rates for the same maturity are currently 10%. Why would someone purchase your bond, with a coupon rate of 4%, when they can buy a new issue paying 10%? If you really need to sell it, the only thing you can do is mark down your bond. You would have to mark down the price to where it would yield 10%. That would be about 30 cents on the dollar, or about $300 per bond. As a result, you would have to sell your $1,000 bond for $300, resulting in a $700 loss.

Interest rate risk impacts long-term bonds more than short-term bonds. The best protection is to own short (under one year) or intermediate (between one and ten years)
maturities.

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